04 October 2024

Location of payment tokens in ancillary bankruptcy proceedings

  • Articles
  • Legal
  • Litigation / Arbitration
  • Restructuring / Insolvency

In its judgement of November 2023, the Court of Appeal of Zurich (Obergericht Zürich) determines the legal status of payment tokens under enforcement law.

  • Dr. Dominik Vock

    Legal Partner

  • Nadira Zellweger-Ferhat

    Senior Legal Associate

 

In its decision of November 23, 2023, (PS230150 ), the Court of Appeal of Zurich had to deal with the question of the localisation of cryptocurrencies (payment tokens) in the context of art. 167 et seq. PILA (recognition of foreign bankruptcy decrees and protective measures).

Underlying facts:

The appellants, liquidators of an insolvent holding company (C. Holdings) under the law of the Cayman Islands, applied for recognition of a foreign bankruptcy decree, and claimed before the Court of Appeal of Zurich (hereinafter: "Court of Appeal") in particular that the indirect majority shareholder and director of C. Holdings had misappropriated Ether from C. Holdings. He ultimately transferred these assets to a protocol (hereinafter "E. Protocol"), which was developed by a public limited company, E. AG, domiciled in Zurich (consid. 3.2). The E. Protocol is a so-called smart contract on the Ethereum blockchain, which allows users to deposit Ether as collateral in a so-called collateral pool and to obtain loans in return of the cryptocurrency H. (a so-called stablecoin whose value is linked to the US dollar; consid. 3.2). The appellants argue that E. AG, as the developer and owner of the E. Protocol, continues to exercise a certain degree of control and power of disposal over the misappropriated assets and that these should therefore be administered in the ancillary bankruptcy proceedings. In addition, the assets should be blocked as a protective measure (consid. 3.2).

The lower court denied local jurisdiction and dismissed the appellants' requests.

The appellants appealed against the judgement of the lower court to the Court of Appeal.

Considerations of the Court of Appeal

The Court of Appeal held that the question of the localisation of cryptocurrencies in the context of art. 167 et seq. PILA in order to subsequently determine whether local jurisdiction exists for the recognition of a foreign bankruptcy decree and the ordering of protective measures (consid. 3.5).

The Court of Appeal first explains various terms, such as cryptocurrencies, distributed ledger technology  (DLT; in particular permissionless DLT systems), blockchain, smart contract, DeFi, (payment) tokens  and wallets  (see consid. 4.1). With regard to payment tokens (cryptocurrencies in the narrower sense), the Court of Appeal then adheres to the prevailing doctrine, which classifies them as purely factual, intangible assets and not as claims or other rights. This is because, according to the Court of Appeal, payment tokens are more comparable to objects than to claims (consid. 4.2 and 4.3). Because the legislator has not yet dealt with the localisation of payment tokens as intangible assets in accordance with art. 167 para. 1 PILA, the location of payment tokens under enforcement law must be determined in a legally progressive manner (art. 1 CC; consid. 4.4).

The Court of Appeal considers that incorporeal assets, such as payment tokens, cannot be localised in real terms, but only normatively. The normative localisation must be based on the meaning and purpose of the applicable provision. According to art. 167 PILA, jurisdiction exists at a Swiss place of jurisdiction for the recognition of foreign bankruptcy decrees, provided that the assets that are delivered to the foreign bankruptcy estate in the course of the ancillary bankruptcy proceedings can be accessed at this place. According to the Court of Appeal, the location of the payment tokens should therefore be based on a de facto possibility of access (consid. 4.5).

Accordingly, if there is some form of de facto access to payment tokens at the Swiss place of jurisdiction, then a location of payment tokens that establishes jurisdiction within the meaning of art. 167 para. 1 PILA must be affirmed. According to the Court of Appeal, how and who can actually access a payment token depends on the circumstances of the individual case, whereby distributed ledger systems are subject to ongoing economic and technical development. Therefore, an exhaustive list of connecting factors leading to jurisdiction should be avoided, but depending on the technical design of the payment token or the distributed ledger system, the following could be taken into account (E. 4.6-4.7):

  • (Residential) domicile of the private key holder, as well as their usual place of residence or the location of a hardware wallet;
  • The location of a specific entity that exercises control over the system on which payment tokens are held and transferred (which is the case with permissioned DLT, but not with permissionless distributed ledger systems); or
  • (Residential) domicile of a holder of admin keys that can be used to control the protocol or smart contract.

According to the Court of Appeal, the prima facie evidence of the de facto possibility of access must be sufficient (E. 4.8).

In the present case, the Court of Appeal denied that the payment tokens were located in Switzerland due to a lack of credible evidence that E. AG could control or access them (see E. 4.13-4.19).

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